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Unformatted text preview: CARNEGIE MELLON UNIVERSITY Tepper School of Business INTRO FINANCE FIN 70-391 Prof. Spencer Martin Solution Set 4: Portfolios and Asset Prices A Multiple Choice Warmup 1. Suppose that the standard deviation of returns on each individual stock is 40% per annum and that the correlation between each pair of stocks is 0.25. What is the annual standard deviation of a well- diversified portfolio. (Assume 1 /N = 0 for a well-diversified portfolio) 20% As N increases, the portfolio variance steadily approaches the average covariance = . 4 . 4 . 25 = . 04 . Taking the square root yields 20%. 2. What is the standard deviation of a poorly-diversified portfolio of stocks with an average beta of 1.21? Cant say without knowing more 3. What is the standard deviation of a poorly-diversified portfolio of stocks with an average beta of 0.8? More than 0.8 times the standard deviation of r m 4. What is the capital asset pricing model formula? None of these: E [ r ] = r f + ( E [ r m ]- r f ) 5. Stock A has an expected return of 10% and Stock B has an expected return of 15%. If the beta of Stock B is twice as high as the beta of Stock A, then (according to CAPM) what is the T-bill rate?...
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- Spring '08